Ahead of the Curve

The lending environment is undergoing a worrying change. Funds that European direct lenders have raised but not yet deployed are at an all-time high and banks in most Western-European jurisdictions have renewed lending following years of reticence after the global financial crisis, leading to increased competition amongst lenders in the small and medium enterprise (SME) market.

Securities Services: KAS Bank: ‘We call it custody 2.0’

Over recent years custody has changed drastically from simple safekeeping to high-tech data management, says Albert Röell, CEO of KAS Bank, and custodians sit, like spiders, at the center of a web of data trade and position data.

“We are also in the unique position that we are service providers without any stake in trades or asset management,” he adds.

Custodians are building on this to carve out a new, security guard-like business model.

“We call it custody 2.0,” says Röell. “This is the biggest chunk of our business now. Much of it is a matter of asset administration, information and risk management, but this part of our business also requires a good deal of passive treasury services, where we hedge risks on an ‘execution only’ basis.”

Without providing any consulting or advice – traditionally the realm of consultants and fiduciary managers – the custodian does stand ready to mitigate risks at the implementation level.

“The average Dutch pension fund employs 6-10 asset managers, each afforded a mandate allowing a certain margin for strategic decision making,” says Röell. “But if you’ve awarded eight mandates and all eight of them are being implemented a bit ‘to the left’, on a higher level things will run off track. So it is important to have the necessary software in place that will provide continuous look-through on the level of individual mandates and one level up. If at any point our ‘dashboard’ reveals a movement that diverges from a client’s investment strategy, we have the ability to automatically correct this, provided the client has authorised us to do so.”

This way, ‘custody 2.0’ can help trustee boards to meet the Dutch supervisor’s ever-more-stringent requirements of being ‘in control’ at all times, thus allowing even smaller and mid-size pension funds to continue operating independently, Röell suggests.

This is a significant change of role that has seen KAS Bank invest heavily in separate IT systems for securities custody, clearing and settlement on one hand and ‘custody 2.0’ services including treasury and risk monitoring and management on the other. “Clients can hire us for investment administration services while employing a different party for custody services if they so wish,” Röell explains.

These developments are part of a broader trend of ‘unbundling’ of services and fees in the financial industry.

“This will fundamentally change the industry,” Röell predicts. “Each institution used to offer a full range of services, but now you see all manner of generic services being peeled off.Those services are no longer offered by individual providers but, instead, are delivered by a platform that transcends individual institutions.”